On Chinese capitalism

Why Is China Letting the Yuan Fall?
There’s been a lot of speculation about China’s recent currency moves, but it’s business as usual for global capitalism.
by Geoffrey McCormack
See as well,
…in the seven years following the outbreak of the crisis, capital accumulation slowed by 10 percentage points. This underlying weakness in investment is the result of diminishing returns to capital, due to overaccumulation and depressed demand in the world economy.

Waning capital accumulation has pushed down output and employment growth in China….

The gravity of shrinking profits and accompanying instability has not been lost on the Chinese state. The policy of currency depreciation aims to make Chinese exports more competitive on the world market, thereby stimulating profitability and capital accumulation. The dramatic reduction in the value of the yuan is an unambiguous sign that the Chinese state is struggling to cope with critically low profits in trade and industry — the same weakness that led to the recent financial bubble.

capitalist crisis severe

The crash wrought havoc on the individuals and families that poured their life savings into the stock exchange in the hopes of securing a modicum of future security absent any significant social safety net. Tens of millions of Chinese workers have been affected — and many have lost everything.

Anatomy of a Collapse
The Chinese state’s intervention after the stock market crash was immensely political — as was the collapse itself.
by Kevin Lin
he sheer enormity of the destruction was staggering. In less than a month, from mid-June to early July, the Shanghai Composite Index plunged by 30%, wiping out more than $3 trillion in share value from its June 12 peak. The wealth liquidated in the crash was equivalent to approximately 30% of China’s GDP ($10 trillion in 2014), 20% of the United States’s GDP ($17 trillion), and about ten times the size of Greece’s current total debt ($350 billion).

The collapse sent shockwaves around the world, not surprising given that China accounts for more than one-third of global growth. China’s spectacular stock market crash is a testimony to the increasing volatility and the underlying contradictions of the Chinese economy. More importantly, rather than simply being a financial crash, it is also immensely political.

No one can claim they didn’t see it coming — the only uncertainty was the exact timing of the crash. Since last year, there’s been a 150% rally fueled by margin trading (the practice of using borrowed money to buy stocks). The overvaluation of shares was widely recognized, with some analysts estimating by more than 20 percent. The mainstream financial press had been describing it as a bubble for months. Even the Chinese government, which had encouraged people to invest, issued warnings back in April, and tried to tighten trading rules to dampen the exuberance.

The crash finally came this month, producing widespread panic and pushing the Chinese government to implement a range of stopgaps.

It halted all new stock listings, restricted short-selling (the practice of betting against price falls), and ordered some of the largest state-owned enterprises — and even the state pension funds – not to sell shares. Instead, the Chinese state quickly made plans to buy more shares, while the country’s top twenty-one securities brokerages collectively pledged to purchase shares worth at least $19 billion. The Chinese government also directed the central bank to lend money to brokerages and investors to buy shares totaling $365 billion.

It was this highly political intervention into the stock market — popularly dubbed jiushi, or “rescuing the market” — that came as a surprise to many, both within China and abroad. And what made it even more political was the thought of what the spectacle of tens of millions of individual investors — ordinary people investing their incomes, loans, and savings — suddenly losing their money might do to the legitimacy of the Communist Party.

The Chinese Economy and Its Discontents

Stock market crashes are a relatively new phenomena in China — during Mao’s reign (1949–1976), stock exchanges were regarded as a capitalist institution and thus abolished. They weren’t reintroduced until 1991, well into the post-Mao reform period.

In these early years, however, buying shares was considered too risky; instead, investors and ordinary people preferred to purchase government-issued bonds or put their money in state-owned banks for safe returns. Incomes for the majority of the population were also quite low, so few people could afford to invest in the stock market. While volatility and risk certainly existed, stock market crashes were not a part of the economy.

This started to change in the 2000s as China’s economic growth, facilitated by financial liberalization and the commercialization of the banking system, channeled money into the stock market and fueled a huge bubble. Between October 2005 and October 2007, the Shanghai Composite Index grew from a little over 1,000 points to almost 6,000 points — only to plummet to less than 2,000 points with the onset of the global economic recession.

The effects on Chinese industry were even worse. In the first six months of 2008, with the export sector shrinking due to declining demand in the North American and European markets, 67,000 factories closed across China. In the final quarter of 2008, an additional 50,000 factories were shut down. An estimated 20–30 million rural migrant workers temporarily lost their jobs in the process, and labor protests spiked. Many returned to their rural hometowns.

Intent on instantly propping up the country’s falling growth rate, the Chinese government rolled out a $586 billion stimulus package that focused on infrastructure instead of social services and welfare. It largely worked.

The stimulus, and government intervention more broadly, was credited with successfully staving off a deeper recession. With mass unemployment and social unrest still a threat, it has committed to keeping its foot on the pedal and boosting the annual rate of economic growth above 8%.

Despite the government’s concerted intervention, China’s GDP growth rate has continued to decline: a mind-boggling 14% in 2007, it dipped to less than 10% for a few years, and then dropped to 7.4% last year — quite good by international standards, but low for China. This year, GDP growth is likely to be 7% or less, causing concerns about a further slide.

The government has made a virtue out of the slowdown, describing the Chinese economy as entering a period of “New Normal” in which growth is purportedly more balanced and sustainable. But there are lingering economic contradictions that are related to the recent stock market crash.

The housing market, built on the back of rapid urbanization, invited speculation that inflated housing prices. The rapid uptick prompted the government to depress housing prices in an attempt to prevent the bubble from bursting and triggering a wider crisis. This deflationary tactic rendered investment in housing and manufacturing industries less profitable, sending investors looking for high returns (often on borrowed money) to the stock market.

At the same time, the post-crisis stimulus package was being financed mainly through bank lending rather than direct state grants, and was made possible by loose monetary policy. The stimulus ended up exacerbating the existing local government debt problem, which the Chinese government was still working to address via a debt-for-bond swap program shortly before the stock market crash.

Finally, while fixed investment has contributed significantly to China’s growth, consumption levels remain low as a percentage of GDP. A sharper increase in domestic spending is necessary for the transition from an investment and export-led economy to a consumption-driven one, but this is a political issue more than an economic one. Low levels of consumption reflect the increasing share of incomes going to capital instead of labor in the post-Mao era, where workers have lost employment security and labor rights, and face enormous difficulty organizing independently and engaging in collective bargaining.

The expansionary monetary and fiscal policies the government has implemented since the financial crisis have largely failed to resolve these problems, and the recent crash has only made the situation worse.

The crash rekindled the age-old debate about the role of the state in markets, and the government response is being seen as a setback for free-market advocates both inside and outside of China.

We will likely hear strong calls for greater financial liberalization and a larger role for the market in the Chinese economy. Indeed, there are already criticisms of government intervention and reports of global capital’s displeasure.

The Communist Party is not opposed to more marketization. It has made clear its receptivity to more market-oriented reforms, including financial liberalization, and its willingness to encourage more market competition, private businesses, and individual consumption. However, it has not been able to implement significant reforms due to opposition within the government and state-owned industry. The current anti-corruption campaign is seen as clearing the way for the reforms.

The Left has to resist such deepening marketization, which will only lead to more economic instability and widening inequality.

However, our knee-jerk response should also not be to defend Chinese state intervention in the economy as such.

The Chinese government is responsible for creating a financial environment where individual investors are lured into gambling their incomes and savings, and its recent actions will likely inflate the bubble further.

Instead, we need to demand more regulation of the financial sector, as well as more equitable distribution of incomes so people won’t depend on risky investment strategies to compensate for low wages and high living costs.

Because of the highly restricted political space in which they operate, China’s social movements — including the restive labor movement, the environmental movement, and the feminist and anti-discrimination movements — often fly under the radar.

But they remain China’s only hope for a more socially just and environmentally sustainable society. When the next crash comes, the ability to chart alternative responses rests on their organizational capacity.

The Devaluation of the Yuan
by Prabhat Patnaik
The Chinese central bank’s decision last week to let the yuan depreciate, in three stages by almost 4 percent against the US dollar, was officially explained as a move towards greater market determination of its exchange rate. Though this explanation pacified stock markets around the world, China’s devaluation of the currency portends a serious accentuation of the world capitalist crisis.
http://mrzine.monthlyreview.org/2015/patnaik270815.html